Debt and Taxes

BlogDEBT&TAXES.400wIn our glee at discovering how easy it is to buy things we cannot afford, we tend to overlook a workable strategy for incorporating debt into our financial behavior. When we are young and employed, we can support debt to buy a house, buy a car, or grow a business. When we are old and retired, continuing to support debt closes the doors to more pleasant possibilities. In return for tax deductions of present contributions to our IRA and 401k plans, all withdrawals —principal, interest and capital gains— are fully taxable on our state and federal income tax returns. At age 70, plan owners must begin annual minimum required distributions the rest of their lives. Like debt, this pushes the inevitable cost of a present benefit into the hazy future. For many of us, coupling debt payments to the tax cost on retirement plan withdrawals can become unbearable. In our younger years we tend to assume such things will just work out when the time comes. The real glee is available to people who work this out now, well enough to enter retirement debt free with minimal taxes on investment income… for the rest of their lives.